An assumable mortgage is financing in lieu of taking out a new loan, the proceeds from which would pay off the first mortgage.
How Does an Assumable Mortgage Work?
As an example, let’s say Joe wants to buy Mary’s home. Her existing mortgage is assumable, so Joe can simply approach her lender to take over the loan. But lenders won’t simply turn over the keys to a new borrower. Joe must meet certain qualifications, and Mary’s lender must approve the change. The lender will still require a credit check, a loan application, and other data before the mortgage can be assumed, but it won’t be setting any new terms or rates. It’s simply determining whether the buyer can stay current on the loan if approved.
Pros and Cons of Assumable Mortgages
The most significant advantage of an assumable mortgage is that you’re essentially grandfathered into an existing mortgage loan. This could open the door to homeownership if you don’t have a good chance of getting approved for your own loan. A downside to assumable mortgages is that they often won’t cover the entire home purchase. The owner has likely reduced their loan balance at least somewhat over time, so it won’t be enough to cover the property’s sale price. You might need cash or a second loan to cover the difference. This is basically your “down payment."
How To Get an Assumable Mortgage
Sellers and their agents sometimes mention in MLS listings or advertisements that their home’s mortgage is assumable, so check listing descriptions. Look at sites like TakeList.com that offer lists of assumable homes on the market. You’ll have to meet certain income and credit-related requirements that can vary by loan type and lender, and fees will be charged as well. You must pay a funding fee of 0.5% of the assumable loan’s balance on a VA loan, and the assumption must be approved by the VA or the loan’s lender in advance. As with any mortgage process, you’ll incur various costs for the processing and transfer of the loan, including:
A VA funding feeAn assumption feeRecording expensesCredit report pullsTitle search and insuranceEscrow costs
You might also have to guarantee the lender that the property will be your primary home.
